PetroChina and Sinopec Will Never Be The Same Again

CHINA’S two giant state-owned oil, gas, refining and petrochemicals companies have enjoyed many fantastic years during which they could do just about what they liked, according to an increasing number of critics.

“You can’t control them,” an official from China’s National Development and Reform Commission (NDRC) is quoting as saying in the hugely important film, Under The Dome, which reflects huge public anger at the state of the environment.

“Say you have an only child and this child is picking up some bad behaviors. As his mother, what can you do? All you can do is give him one good beating, but you can’t beat him every day.”

Also during the movie, Chai Jing, the maker of the film, accuses the two state-controlled giants – China National Petroleum Corp (its listed arm is PetroChina) and Sinopec – of wielding their outsize influence to lower standards for automobile fuels.

The film’s creator, an investigative journalist, makes the link between CNPC’s and PetroChina’s poor environmental standards in general and China’s appalling air quality. A study by published by Lancet, the UK medical journal, estimates that air pollution resulted in 1.2 million premature deaths in China in 2010.

Enormous changes have taken place in China’s attitude towards the environment since Li Xinping, the country’s president, and Li Keqiang, China’s prime minister, came to power.

What points to this shift is that Under The Dome was allowed to remain online long enough for it to receive some 200 million hits.

Even more remarkable is that Chai, rather being investigated by the authorities, has instead received strong official praise.

This praise came from China’s newly appointed Minister of Environmental Protection, Chen Jining, who is a former environmental scientist. He sent a text to Chai thanking her for the film and even compared it with Rachel Carson’s “Silent Spring”, the 1962 study of pesticides that helped launch the America’s environmental movement.

Yes, Under The Dome was taken off-line ahead of this year’s recently concluded National People’s Congress (NPC) – China’s annual parliamentary meeting. But I think this was probably just a rather slow reflex reaction, based on years of being in the habit of censoring anything that criticises “vested interests”,

But in the closing remarks to this year’s NPC, Li said that the government was “determined to tackle smog and pollution”, and that no company was above the law.

This followed Xi’s comments on 6 March, when he said that he would “punish, with an iron hand, any violators who destroy ecology or the environment, with no exceptions”.

These strong words have been backed up by a great deal of action – most notably, the use of the anticorruption campaign to clampdown on CNPC.

According to Chinese media reports, more than 45 CNPC employees and officials have come under investigation. Online news portal Sina Finance reports that CNPC has even instituted a policy to deal with a wave of secret detentions: High-ranking employees all have designated back-ups who will take over duties if they have gone missing for a set period of time.

Much of that activity has reportedly swirled around the patronage networks of Zhou Yongkang, the ex-security czar who last year became the highest-ranking official to come under investigation since the establishment of the People’s Republic in 1949. Zhou spent decades rising through the ranks of China’s oil bureaucracy, serving as the Chinese Communist Party secretary of CNPC before climbing into the Politburo Standing Committee, the most powerful body in China.

Then came the news on Monday that Liao Yongyuan, CNPC’s general manager, is also under investigation for corruption.

“Each state-owned enterprise tends to be a mini empire,” said Professor Dali Yang, who researches Chinese politics at the University of Chicago, in the same Huffington Post article.

“They have become very powerful vested interests in the Chinese system, so anti-corruption is not only useful in fighting against corruption but also makes it possible for Xi’s agenda, for the agenda of the Communist Party, to be carried out, to be obeyed.” A major feature of this agenda is the new approach to the environment.

What does all of this mean for CNPC and Sinopec? Here are some initial thoughts:

CNPC’s new management team will have to raise fuel standards. This will involve removing the particulate matter, especially PM2.5 particulates that are a major cause of China’s air-pollution deaths.

And, of course, those who run Sinopec must now at long last follow suit if they want to keep their jobs and liberty.

Refineries and petrochemicals plants will also have to adhere to much-higher standards – and gaining approval for new petrochemicals plants might become even harder.

A way to pay for this would be to, as Chai suggests, opening up the energy sector to foreign competition. The theory goes that this would force CNPC and Sinopec be much more efficient, leading to enough profitability to pay for these improvements.

But I don’t think this is likely, at least over the next few years.

Instead, I think it more likely that the “mini empires” described by Professor Dali will disappear, leaving CNPC and Sinopec more firmly under state control. The money will then be provided to clean-up PetroChina and Sinopec’s operations.

We then need to think further about what this means for both the nature and extent of petrochemicals capacity expansions – most notably, perhaps, coal-to-olefins (CTO) expansions.

The snap conclusion is that this will greatly limit the number of new CTO plants. You can deduce this by simply reading about China’s plans to cap coal consumption to below 65% of total primary consumption by 2017 – and 50% by the middle of this century. To this end, coal consumption declined in China last year.

But I think it is more complicated than this. CTO plants will create more jobs in inland China, as they are the basis for wider economic development. Build these plants and you create the petrochemical raw materials for many downstream manufacturing industries.

Further, integrated coal-gasification complexes can help solve China’s environmental problems. Synthetic natural gas made from coal at these complexes is being piped to China’s cities, where it is replacing coal in power generation – and so improving air quality in these cities.

Here is something else to think about: Pollution from CTO plants represent a great economic opportunity. These emissions could be used as a springboard to develop a local carbon capture and storage industry, which is exactly the type of industry China wants as it tries to tackle its environment problem whilst also moving up the manufacturing value chain.

This kind of complexity in China is only going to grow as its New Normal” develops.